The Canadian Institute of Actuaries (CIA) has published an educational note, updating earlier versions published in June 2022 and July 2023, to reflect recommended changes after inflation materially impacted the CIA’s reference curves.
The note, IFRS 17 Discount Rates for Life and Health Insurance Contracts, published December 13, 2023, replaces the earlier educational notes after the CIA’s committee on life insurance financial reporting (CLIFR) convened a subcommittee to address the impact inflation had on earlier reference curves.
“In the process of updating the parameters of the reference curves for 2023, it was observed that the significant rise in short-term inflation relative to long-term inflation expectations had a material impact on the reference curves’ ultimate risk-free rate (URFR),” they write. “As this material impact was not expected, a subcommittee of CLIFR was formed to review the approach to determine the reference curves’ URFR. A summary of the changes recommended by the subcommittee (and their rationale) can be found in the educational note supplement published in July 2023: Changes to the Reference Curves’ Ultimate Risk-free Rate Development Approach Outlined in the Committee on Life Insurance Financial Reporting’s Educational Note on IFRS 17 Discount Rates.”
They say the updated version reflects the changes recommended by this subcommittee; June 2022 and July 2023 version of the educational note will be archived by the CIA.
“The actuary should be familiar with relevant educational notes. Educational notes are not binding; rather they are intended to illustrate the application of the standards of practice,” the updated educational note states.
In the note, the CIA discusses the development of discount curves under IFRS 17. The chapters include education on establishing the last observable point on the yield curve in Canada, setting long term risk-free rates, the liquidity characteristics of insurance contracts and the development of illiquidity premiums. Chapter two includes reference curves, deviations from the reference curves and guidance for disclosures.
“The CLIFR has prepared this educational note to provide guidance related to setting the discount rates for the purpose of calculating the present value of estimates of future cash flows under IFRS 17,” they write. “The first chapter is intended to illustrate various considerations in developing an entity’s IFRS 17 discount curve without narrowing the choices available to the entity under IFRS 17. The chapter focuses on aspects of setting the discount rates that are specific to the Canadian market.”
They add that similar considerations and approaches could be used for setting the discount rates for other currencies, as well.
